Regulator Suggests Ways to Simplify Bank Capital Rules

The world's top banking regulator on Monday suggested possible changes to help simplify new rules on bank capital being introduced to strengthen the industry after the financial crisis.

The regulator, the Basel Committee on Banking Supervision, published its suggestions after a review of the capital rules to see if they had become overly complex. It will seek feedback from the industry on its suggestions.

Several policymakers, including the Bank of England's head of financial stability Andrew Haldane, had criticized them as such.

The review identified several areas where complexity had produced negative effects, such as making it harder for banks to plan their capital needs and leading to less accurate assessments of risk.

Basel Committee chairman Stefan Ingves said the regulators were "keenly aware" of the debate on whether the rules were too complex but had not yet decided whether they should be changed.

"The Committee believes that it would benefit from further input on this critical issue before deciding on the merits of any specific changes to the current framework," he said.

But the regulator still believes that a "risk based" system, which inevitably involves some level of complexity, should remain at the heart of financial regulation since it takes account of risk more precisely than a more broad-brush approach.

The Basel review also found that the rules risked undermining the ability of supervisors to do their jobs, since the methods employed by banks are so sophisticated, and could lead to an under-estimating of capital requirements and the taking on of too much risk.

In a 27-page document, a Basel Committee task force charged with examining complexity in global bank regulations, set out a range of "potential ideas" to improve the rule-book.

These included compeling banks to standardize disclosure of information and limiting the discretion of national supervisors, since this makes it harder for investors and other interested parties to compare banks across countries.

National discretion is particularly significant in the area of risk weighted assets, where a Basel Committee study released on July 5 showed vast differences in the way the rules were applied in different countries.

These different treatments of risk assessment result in different figures for banks' capital ratios, the benchmark number for their financial health.

The comparability of banks' risk weighted assets has also been blighted by the fact that some banks use "internal" models to set their risk weights rather than using standardized models.

The Basel committee task force suggested "re-examining" the use of these internal models and to make greater use of floors and benchmarks that would make it harder for banks to deviate from industry norms.

It also suggested enhancements to a leverage ratio, which is a simpler way of limiting banks' capital requirements by restricting their assets to a given proportion of their capital.